HR leadership in private equity is starting to catch on. And it's a seemingly common-sense idea that is now, with the economic crisis, looking positively brilliant.
After decades of focusing on cost-cutting and operational issues in turning companies around, some private-equity firms have recently concluded that a little talent development might not be bad, either. In the last year or two, they've been hiring high-powered HR leaders to work closely with their portfolio companies, making sure the right CEOs and other senior leaders are in place and working toward the right goals.
"Strategic HR is finally coming to private equity," says Fred Foulkes, professor of organizational behavior and faculty director of the Human Resources Policy Institute at the Boston University School of Management.
Among the handful of stars in this new role at private-equity firms are Peter M. Fasolo, the former chief talent officer at Johnson & Johnson, who is now at New York-based Kohlberg Kravis Roberts & Co., and Dennis Donovan, the former executive vice president of human resources at Home Depot, who is now the chief human resource officer for Cerberus Capital Management, also New York-based.
When a private-equity firm buys an under-performing public company or the sleepy division of a large corporation, it does so with an "investment thesis" -- a very specific agenda of how to drive growth and add value at the company or division, so that it can be resold at a healthy profit.
Private-equity firms are beginning to realize they'll have a far better chance of success if the new acquisition's senior leadership is not only on board with the agenda, but actively working to carry it out.
Those firms that started thinking about HR before the economic downturn hit hard are in an even better position to weather the storm, experts say. With credit dried up, very few deals are being made -- which means private-equity firms are holding on to their portfolio companies longer than planned. And many of those portfolio companies are suffering slumping sales.
"They're stuck with a lot of investments they didn't think they would have for a long time," says Foulkes.
Fasolo agrees that, in the struggling economy, talent development at portfolio companies is essential.
"As the economy gets more challenging, it becomes even more critical," he says. "One really needs to focus on ensuring that the operating performance of the company is firing on all cylinders.
"When consumer spending is low," Fasolo adds, "you have to ask, 'Where are you driving value? Do you have the right leadership, the right communication strategies? Do you have an aligned and engaged workforce?' You want to make sure the CEO feels confident, and that you have a management team that can deal with the challenges."
This trend toward strategic human resource practices may be new, but it's growing fast.
Brian Wilkerson, the global practice director for talent management at Watson Wyatt Worldwide, says that a couple of years ago, "only one or two" of the 30 largest private-equity firms had initiatives to ensure that their portfolio companies had the best possible senior management.
Now, says Wilkerson, 10 or 11 are doing the work in some form -- about half using their own staff and half relying on large consulting companies.
"In the past, they'd say, 'We really have to get the right three people at the top,' " says Wilkerson, who is based in Denver. "Now, they're looking at all the critical people -- the key sales people, the key operations managers. Not necessarily vice presidents, but the people who make things happen day-to-day."
Covering All Bases
Fasolo's work actually begins before KKR purchases a company, during the due-diligence phase.
"I get involved with our deal teams where there is a high probability of a deal that will come to fruition," he says. He works with the team to help assess the strength of the soon-to-be-acquired company's existing management.
"We look at management practices," says Fasolo. "Do they do engagement surveys? Succession planning? Who do they hire? Who gets promoted?" The idea, he says, "is to get a sense of the rhythm of the management practices."
When the time comes for KKR to decide whether to go ahead with the purchase, Fasolo offers his thoughts -- as do KKR officials who have been studying legal, financial, commercial and other aspects of the deal. "I am a voice around the table," he says.
As soon as KKR buys a new company, Fasolo moves into action. He spends the first six weeks assessing the organization's top 45 or so executives.
KKR's partners "want a really objective view of the strengths and gaps of the management team," says Fasolo, who has been at KKR since January 2008 and is the chief talent officer for the firm's some 25 North American portfolio companies. "What may have been required leadership in the past may be different than what is required now. Do we need a cost-cutter? Do we need someone with international experience?"
Worldwide, KKR has 48 portfolio companies that together employ more than 850,000 people and generate more than $200 billion in annual revenue. Among its holdings are Dollar General, Toys "R" Us, Legg Mason and Sealy. Its most well-known acquisition came in 1988, when it took over RJR Nabisco in what, at the time, was the largest leveraged buyout ever. The $31 billion deal became the subject of the book Barbarians at the Gates: The Fall of RJR Nabisco, which was turned into a made-for-TV movie starring James Garner.
KKR had planned to go public on the New York Stock Exchange last year -- following the 2007 initial public offering of its rival, the Blackstone Group -- but in November put its plans on hold.
During those first six weeks at a new company, Fasolo -- usually along with two or three people from an outside consulting firm -- spends about three hours with each of the top 45 executives.
Through a combination of conversations and written assessment tests, they try to get a sense of the person's performance track record and long-term potential, as well as his or her openness to learning and change.
"We also try to understand the potential de-railers, where the executive's blind spots are," he says. "The one thing that will kill us is arrogance, the smartest-person-in-the-room syndrome."
Fasolo also explains to the executives KKR's plan for the company in an "open, transparent and direct way," he says. "We say, 'Here's who we are, here's what our values are, here's where we think we can drive value."
In addition to the meetings, Fasolo and the others perform 360-degree assessments on the executives, talking to people inside and outside the company.
While KKR might decide not to keep some of the executives, the larger goal of the evaluation "is not who stays and who goes," says Fasolo. "There's a new strategic direction. The faster we communicate that, the faster we can go in that direction."
Each of the 45 executives is given extensive feedback and a detailed development plan to help them carry out KKR's goals for the company. That plan might call for the executive to be put in new roles, such as running a range of divisions, taking on a staff position or gaining experience in other parts of the world.
In addition, they may need ongoing executive coaching -- which Fasolo himself often provides.
The executives then meet with their bosses, whose jobs are to help carry out the executives' development plans. "We make sure the boss has in his objectives his commitment to his direct reports," says Fasolo. "He's held accountable."
The portfolio company's board of directors -- made up of KKR partners and other investors -- will regularly meet with the bosses to review how each executive is progressing.
Board members will "take out the development plan and look at what was committed," says Fasolo. "They'll say, 'You have seven direct reports, you said you were going to do these things. Show us what you have done.' "
Adds Fasolo, "It's a pretty important way to ensure commitment and accountability."
Assessing the Surge
Wilkerson of Watson Wyatt Worldwide has been following the trend of private equity and talent development, but he can't say exactly why it suddenly sprang up -- why various firms began initiatives all about the same time.
One reason, he says, may be that private-equity executives often move from one firm to another, so the idea may have spread through top leaders. But it is clear, he says, that these firms are finally getting the message that talent development is critical.
Foulkes of Boston University says private-equity firms see the need to bring strategic HR to their portfolio companies -- making sure that human resource initiatives such as executive-compensation strategies, performance management and succession planning are aligned with overall business goals.
In addition, "they're taking a fresh look at how these companies are doing benefits, particularly healthcare."
While HR chiefs at some newly acquired companies might already be thinking strategically, many are not, says Foulkes.
"These companies have been acquired for a reason," he says. Private-equity firms "are buying a division or a company that hasn't been run too well, and they think they can improve it."
Rita Gunther McGrath, a professor of management at Columbia Business School in New York, agrees that private-equity firms are getting serious about talent -- particularly now that the economy is slowing deal-making to a trickle.
It is no longer feasible to simply turn a company around quickly and then put it up for sale, says McGrath. These companies no longer have the luxury of focusing only on the short term, she says.
"The private-equity firms are going to have to make sure they don't destroy the underlying value of the companies," she says.
McGrath adds, "It's like going on a crash diet. You look great for the Christmas party, but then you gain all the weight back."
Now, she says, the firms want to make sure they look good for the long term.
Throughout the acquisition process, Fasolo works closely with the company's HR chief. He says his relationships with the HR leaders are highly collaborative -- and they have to be.
"It's dangerous to try to be the 'insider-outsider' without the cooperation" of HR leaders, Fasolo says. He needs that cooperation because, when he leaves, they have to continue the work he has started.
Sometimes when a company is bought by KKR, the CEO and other top executives do have to be replaced.
"We very objectively and candidly look at the management teams, and put leaders in the right places," says Fasolo. "It's not harsh or mean; it's not good or bad; it's simply realistic."
When a senior leader needs to be hired, Fasolo works closely with the various executive search firms -- such as Spencer Stuart -- that KKR uses regularly. John Wood, a senior director at Spencer Stuart who is based in New York, says having someone in Fasolo's position makes the search process much faster and more effective.
Because Fasolo understands the needs of both KKR and the portfolio company, he can help KKR's partners "crystallize their thinking" on where the search should go and who should be hired, says Wood.
"He can work with us to extract what we need from the partners, Wood adds.
Fasolo's extensive experience with executive searches also helps guide KKR in choosing which search firms are right for which jobs, says Wood. "He understands our strengths and weaknesses."
Once an executive has been hired, Fasolo assists with the onboarding process, helping to integrate the person into his or her new role. In addition to his work during the due-diligence and post-acquisition phases, Fasolo plays still another role -- traveling to any of KKR's portfolio companies that may be able to use his expertise. "I'm available for ongoing support," he says. "It's like 24/7 roadside assistance."
In some cases, the companies he visits are chosen by KKR's portfolio management committee, which regularly reviews the strategies, operating performance and management of the companies. At other times, he may be invited in by a portfolio company's CEO or HR leader who wants to take advantage of his expertise.
For example, not long ago, the head of HR at one of KKR's large portfolio companies "asked me to come in and spend a day with him and his HR team to review their compensation approach and philosophy, their succession planning and their leadership training. They had just done the benchmarking, and he wanted another perspective."
Fasolo says he "listened and provided ideas. I tried to be helpful."
HR chiefs will also ask Fasolo to help them conduct a CEO search or a succession review, or may want advice on a compensation or bonus plan. Because Fasolo's role at KKR puts him in touch with companies across a wide range of industries, CEOs and HR heads often ask him how other companies deal with the same kinds of problems they face.
"They want an objective sounding board," he says. "They want to know what we do at other portfolio companies." Fasolo also frequently provides executive coaching to CEOs and other leaders to help develop their skills and strategies.
"Our discussions with our CEOs go beyond, 'Did you hit the numbers?' " Fasolo says.
"We look at what they're doing to develop their own people and the culture of the company," he says. "We look at what they're doing personally, for their own leadership.
"I try to see how they can be most effective," he adds. "I try to get them to blossom."
Although he performs many of the same tasks an outside consultant might, Fasolo says he has an insider's knowledge of the company and concern for its well being. "I'm not giving advice and walking away," he says. "I'm with them for the long term."
Prior to working for Johnson & Johnson, Fasolo held a variety of senior-level HR roles at Bristol-Myers Squibb -- the last as chief talent officer. And though he has extensive experience at public companies, the private-equity model has a lot to teach, he says.
"What private equity does is invest very quickly in the leadership of the company," he says. "Your time frames are very focused, and you learn very quickly what the key drivers of value creation are. It immediately focuses the management team on the things that matter."
Todd Fisher, KKR's London-based chief administrative officer, says Fasolo's work is particularly important because the firm generally holds onto portfolio companies longer than most private-equity firms -- seven to eight years on average. Unlike some private-equity firms that tend to buy and resell companies quickly, KKR generally buys large, complex companies that require more of a long-term investment.
Says Fisher, "You have to be focused on how you build long-term value for the company."
Fisher, who helped develop Fasolo's role and also helped put his European counterpart in place last summer, says those efforts grew out of the view that KKR had become proficient at improving operations at its portfolio companies, and it was time to focus more on talent development.
Now, in the midst of the economic downturn, that strategy is more important than ever, says Fisher. "It's going to differentiate the winners from the losers," he says.